Further to the investment note we issued in August 2015, following a significant sell-off, it does now appear that market nerves have been calmed somewhat. However, the markets have shifted their focus from China to the USA, where there is an endless debate on when we will get the first rate rise. The lack of action from the Fed has caused the markets to struggle to find any direction, with a broadly sideways movement occurring year to date.
Our feeling is that the rate rise is being deferred because of the strong US Dollar and we would be surprised to see rates rise in the US before January 2016. Here, the Bank of England is indicating that they may be deferred as far as early 2017. These delays tell us that both growth and inflation remain at very low levels and it is therefore difficult for these central banks to fully justify a rate rise.
If there is one strong theme across all stock markets for both for this year and the last quarter, it is the very large increase in short term volatility. Although we are long term investors, the volatility is causing clients to focus on the short term. Taking the FTSE 100 index as an example, at the time of writing this note, the Index is down 3% on the year. Over the course of the year, the market rose by over 10%, then dropped by 16% and then rallied again by over 3%. We are also seeing individual companies that miss profit targets frequently declining by more than 25% in one day.
Our Key Thoughts:
- Equity investing is a long term endeavour which at times like this requires a lot of patience for themes to play out.
- We continue to favour companies that are smaller and more domestically focussed in the UK.
- We see Europe, which is weak, offering some better returns over the next 12 months as Europe starts to see the benefits of a longer term weaker Euro and much lower energy prices.
- As European companies start to report earnings, any foreign earnings they have will translate into higher Euros and boost their profits. The international companies will also find it easier to compete in export markets against competition quoting in Dollars or Pounds.
- Markets have had a strong bounce from the late summer sell off, with Asia Pacific rising over 10% from the lows seen in September/early October.
- We think that although the volatility spikes will continue, the markets are generally setting up again for a move higher into the calendar year end.
Our efforts are still very much focused on finding funds that will outperform markets over the economic cycle. We target managers who are not widely known to retail investors, but have built up a strong track record with a process that is both robust and different to the majority of the peer group. Ideally, these funds will also help to reduce our exposure to some of the increased volatility.
We do understand that big price swings can bring into focus the very short term numbers and performance. This can be unsettling, but unfortunately we feel that volatility is here to stay and the frequency will, if anything, increase. This will therefore be a factor in any risk based investments. Hopefully, it is reassuring to know that we analyse these moves closely, but you also need to bear in mind the longer term drivers of performance in what we own.
We think once again this year that equity markets will provide a higher return than both cash and fixed interest, but there will be times during the year when the returns will have been significantly reduced by the short term price swings.
In the short term we do not foresee any major shifts in the current holdings we have, but this can of course change very quickly in these markets.